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C.A. NO. 8190 OF 2003 1

'REPORTABLE' IN THE SUPREME COURT OF INDIA  CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 8190 OF 2003

M/S. MARUTI SUZUKI INDIA LTD.                   ...Appellant VERSUS

COMMNR. OF CENTRAL EXCISE, NEW DELHI            ...Respondent

J U D G M E N T

R. F. NARIMAN, J. Vide a show cause notice dated 30.08.2001 that was  

served upon the appellant M/s. Maruti Suzuki India Limited  (then  known  as  M/s  Maruti  Udyog  Limited),  the  Department  gathered,  by  way  of  intelligence,  that  the  appellant  had  cleared inputs/ spares after processing, but duty was only  paid equivalent to the MODVAT credit taken on these inputs  before processing, and hence a substantial increase in the  value of these inputs has escaped payment of duty on account  of value addition in such inputs after processing.  More  specifically, what was alleged was that various spare parts  relatable to motor vehicles that were manufactured by the  appellant and were procured by it in the form of bumpers,  grills,  etc.,  on  which  the  process  of  Electro  Deposition  Coating, namely, EDC took place (which was in the nature of  anti-rust so that the shelf life of the said bumpers, grills,  etc.,  would  be  generally  increased)  have  escaped  duty  on

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account of the value addition of EDC.   The show cause demanded by way of differential duty a  

sum of Rs.2,00,20,310.14/-.  Since the period covered relates  to  August,  1996,  to  March,  2001,  we  need  to  see  the  provisions of Rule 57F of the Central Excise Rules, 1944  (hereinafter referred to as 'Rules') as it existed in three  different periods.  For the purposes of this appeal, however,  there is no material change made post 20.02.1997 or post  31.03.2000 when this rule was twice amended.  For the period  in question, the said rule together with its amendments is  set as hereinbelow: -

Rule for the period August 1996 to 28.2.1997 “57F(1) The  inputs  in  respect  of  which  a  credit of duty has been allowed under rule 57A- (i)  may  be  used  in  or  in  relation  to  the  manufacture  of  final  products  for  which  such  inputs have been brought into the factory; or (ii)  shall  be  removed,  after  intimating  the  Assistant Commissioner of Central Excise having  jurisdiction over factory and obtaining a dated  acknowledgment of the same, from the factory for  home consumption or for export under bond.

Provided that where the inputs are removed from  the factory for home consumption on payment of  duty of excise, such duty of excise shall be the  amount of credit that has been availed in respect  of such inputs under rule 57A.”

Rule for the period 1.3.97 to 31.3.2000 “57F(1)The inputs on which credit has been taken  may be used in or in relation to the manufacture  of final products. (2) The  inputs  may  be  removed,  after  intimating the Assistant Commissioner of Central  Excise  concerned,  in  writing,  for  home  consumption or for export under bond. (3) All  removals  of  inputs  for  home  consumption shall be made - (a) on payment of duty equal to the amount of

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credit availed in respect of such inputs; and (b) under  the  cover  of  invoice  prescribed  under rule 52A.”

 Rules for the period 1.4.2000 to 28.2.2001

“Explanation – When inputs or capital goods are  removed from the factory, the manufacturer of the  final products shall pay the appropriate duty of  excise  leviable  thereon  as  if  such  inputs  or  capital goods have been manufactured in the said  factory, and such removal shall be made under the  cover of an invoice prescribed under rule 52A.”

By their reply to the show cause notice, the appellant  stated that there was no manufacture as understood in law,  but only the process of ED coating which did not, in any  manner, bring into being a new marketable commodity as such.  The bumpers, grills, etc., continued to be bumpers, grills,  etc., even after the process of ED Coating.

The  learned  Commissioner  of  Central  Excise  by  its  order dated 28.02.2002 set out the show cause notice and the  reply in some detail and ultimately came to the conclusion  that on account of certain deductions, the duty that was  evaded by the appellants herein was Rs.1,68,07,499/- instead  of Rs.2,00,20,310/- as stated in the show cause notice.  As a  result, it proceeded to state in its order that the duty  evaded was Rs.1,68,07,499/- and proceeded also to impose an  equivalent penalty of the same amount with the caveat that 25  per cent of the penalty amount would be payable if it is paid  within 30 days of the date of communication of the order.

The  appeal  filed  before  Customs,  Excise  &  Gold  (Control)  Appellate  Tribunal  (hereinafter  referred  to  as

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'CEGAT') was unsuccessful.  The CEGAT after referring to the  arguments of both sides found as follows: -

5.1 We have considered the submissions of both  the sides.  The facts which are not in dispute  are that the Appellants purchase inputs, avail  MODVAT Credit of duty paid thereon subject them  to the process of E.D. Coating and remove the  same on payment of duty equivalent to the amount  of MODVAT Credit availed by them initially at the  time  of  receipt  of  the  inputs.   It  is  thus  apparent that the inputs are removed from the  factory  after  undertaking  the  process  of  E.D.  Coating.   In  view  of  this  the  ratio  of  the  decision  of  the  Larger  Bench  in  the  case  of  Commissioner of Central Excise, Vadodra v. Aisa  Brown  Boveri  Ltd.,  2000  (120)  ELT  228  is  not  applicable as the facts are different in as much  as the inputs were cleared as such in the said  matter.  It has been emphasized by the learned  counsel for the appellants that words “as such”  were not mentioned in Rule 57-F at the relevant  time.  In our view the absence of these words  does not make any difference as Rule 57-F of the  Central Excise Rules deals with the “Manner of  Utilization of Inputs and the Credit”.  The said  Rules provides for the manner of use of inputs as  under: (i) In or in relation to the manufacture of final  products for which such inputs have been brought  into the factory; or (ii)  Removed  from  the  factory  for  home  consumption or for export under bond.

5.2 Proviso  to  Rule  57-F(1)  or  subsequently Sub-rule (3) of Rule 57-F provided  that  where  the  inputs  are  removed  for  home  consumption  on  payment  of  duty,  such  duty  of  excise shall be the amount of credit that has  been availed in respect of such inputs.  It is  thus apparent that the Rule 57-F is in respect of  “such inputs” only.  Further Rule 57 AB of the  Central Excise Rule provides for the removal of  inputs as such.  We, therefore, hold that as the  Appellants  have  removed  the  inputs  after  subjecting them to the process of E.D. Coating,  mere reversal of the MODVAT Credit availed in  respect of those inputs would not be payment of  appropriate amount of duty.  The duty of excise  has to be discharged on the intrinsic value of  the goods as held by the Supreme Court in the

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case  of  Sidhartha  Tubes  Ltd.,  Supra.  Accordingly, the Appellants have to discharge the  duty liability after including the cost of E.D.  Coating  in  the  value  of  the  goods.   The  Appellants, however, would be eligible to take  the  MODVAT  Credit  of  duty  paid  on  coating  material  subject  to  the  satisfaction  of  the  jurisdictional Excise Authority.  In view of the  facts and circumstances of the present matter, no  penalty  is  imposable  on  the  Appellants.   We  accordingly, set aside the penalty imposed on the  Appellants.”

Shri V. Lakshmikumaran, learned counsel appearing for  the appellant, argued before us that CEGAT has lost sight of  the most fundamental aspect of the reply to the show cause  notice,  namely,  that  ED  coating  did  not  lead  to  “manufacture”.  It is only after there is “manufacture” that  the input that is mentioned in Rule 57F(1) ceases to be an  input covered by the proviso to sub-rule (ii) thereof.  It is  his short submission that the “inputs” being bumpers, grills,  etc., continued to be the same inputs for the purpose of the  proviso despite the fact that there may be value addition on  account of ED coating.  He cited various judgments in support  of his submissions which will be adverted to a little later  in this judgment.

On the other hand, Shri Guru Krishna Kumar, learned  senior counsel appearing for the Department, referred us to  the show cause notice and to various judgments in order to  show  that  the  process  of  ED  coating  which  led  to  value  addition, would, in fact, amount to “manufacture” and that  therefore, the “input” would not be the same input so as to  qualify under sub-rule(ii) on a mere reversal of MODVAT duty.

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The duty on the value addition would also therefore have to  be paid.  In support of this proposition, he cited a number  of judgments which will also be adverted to a little later in  this judgment.

In addition, he referred us to Rule 57F (3) and Rule  57F(3A) which, according to him, would show that whenever  there  is  a  value  addition  to  an  input,  the  said  value  addition would also be liable to duty.   

We have heard learned counsel for the parties.  In our  view, on the true construction of Rule 57F(1), it would be  clear that the “input” that is removed from the factory for  home consumption is bumpers, grills, etc., being spare parts  of  motor  vehicles  procured  by  the  appellant  before  us.  According to us, ED coating which would increase the shelf  life of the spare parts and provide anti-rust treatment to  the same would not convert these bumpers, etc., into a new  commodity known to the market as such merely on account of  value addition.

In one of the very first important judgments on the  Central Excises and Salt Act, 1944, namely Union of India v.  Delhi Cloth and General Mills Co. Ltd. [1977 (1) E.L.T. 199],  an important distinction was made between manufacture and  processing.  It was held that processing and manufacture are  distinct concepts in law and only such processing as results  in a transformation, namely, that a new and different article  emerges having a distinct name, character or use, that excise  duty,  which  is  only  on  manufacture,  can  be  levied.

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The relevant portion of the judgment is as hereunder: - “14. The other branch of Mr. Pathak's argument is  that even if it be held that the respondents do  not manufacture “refined oil”, as is known to the  market they must be held to manufacture some kind  of “non-essential vegetable oil” by applying to  the raw material purchased by them, the processes  of  neutralization  by  alkali  and  bleaching  by  activated earth and/or carbon.  According to the  learned Counsel “manufacture” is complete as soon  as by the application of one or more processes,  the raw material undergoes some change.  To say  this is to equate “processing to manufacture” and  for this we can find no warrant in law.  The word  “manufacture”  used  as  a  verb  is  generally  understood to mean as “bringing into existence a  new  substance”  and  does  not  mean  merely  “to  produce  some  change  in  a  substance,”  however  minor in consequence the change may be.  This  distinction is well brought about in a passage  thus quoted in Permanent Edition of Words and  Phrases, Vol. 26, from an American judgment.  The  passage runs thus:-

“Manufacture implies a change, but every  change  is  not  manufacture  and  yet  every  change  of  an  article  is  the  result  of  treatment, labour and manipulation.  But  something more is necessary and there must  be  transformation;  a  new  and  different  article must emerge having a distinctive  name, character or use.”   

18. These considerations of the meaning of the  word “goods” provides strong support for the view  that “manufacture” which is liable to exercise  duty under the Central Excises and Salt Act, 1944  must be the “bringing into existence of a new  substance known to the market”.  “But”, says the  learned  Counsel,  look  at  the  definition  of  “manufacture” in the definition clause of the Act  and you will find that “manufacture” is defined  thus:

Manufacture  includes  any  process  incidental or ancillary to the completion  of a manufactured product.” S.2(f)

19.  We  are  unable  to  agree  with  the  learned  Counsel that by inserting this definition of the  word  “manufacture”  in  S.2  (f)  the  legislature

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intended to equate “processing” to “manufacture”  and  intended  to  make  mere  “processing”  as  distinct  from  “manufacture”  in  the  sense  of  bringing into existence of a new substance known  to the market liable to duty.  The sole purpose  of inserting this definition is to make it clear  that  at  certain  places  in  the  Act  the  word  'manufacture'  has  been  used  to  mean  a  process  incidental  to  the  manufacture  of  the  article.  Thus in the very Item under which the excise duty  is claimed in these cases, we find the words “in  or in relation to the manufacture of which any  process is ordinarily carried on with the aid of  power”.  The definition of 'manufacture' as in  S.2(f)  puts  is  beyond  any  possibility  of  controversy that if power is used for any of the  numerous processes that are required to turn the  raw material into a finished article known to the  market  the  clause  will  be  applicable;  and  an  argument  that  power  is  not  used  in  the  whole  process  of  manufacture  using  the  word  in  its  ordinary sense, will not be available.  It is  only  with  this  limited  purpose  that  the  legislature,  in  our  opinion,  inserted  this  definition  of  the  word  'manufacture'  in  the  definition section and not  with a view to make  the  mere  “processing”  of  goods  as  liable  to  excise duty.”      

However, to buttress his submission Shri Guru Krishna  Kumar,  learned  senior  counsel,  referred  us  to  various  judgments laid down by this Court.  First, he referred us to  'Sidhartha Tubes Limited   v.  Collector of Central Excise'  [2000 (10) SCC 194].  Since this judgment was also the only  judgment relied upon by CEGAT in the impugned order, it is a  little important to understand what exactly was held therein.  In this case, the appellant manufactured mild steel pipes and  tubes.  At this stage, the product was known as “black pipe”.  Part of the production of the black pipe was then taken to a  separate  shed  in  the  appellant's  factory  premises  and  galvanised.   On  facts  in  that  case,  the  appellants  had

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themselves in their classification list separately declared  black pipes and galvanised pipes as their products.  In such  a  situation,  this  Court  held  that  while  the  process  of  galvanisation by itself may not amount to manufacture, yet  since it added to the intrinsic value of the product declared  by the appellants themselves separately as galvanised pipes,  the value of galvanised pipes would include the element of  the cost of galvanisation.

From this judgment, Shri Guru Krishna Kumar, learned  senior  counsel, wanted  us to  accept as  the ratio  of the  judgment that duty must be paid on value addition despite the  fact that the process of galvanisation would not amount to  manufacture.  Not only is this not the ratio of the judgment  as we see it but it would, in fact, conflict with other  judgments directly on the point.

In Commissioner of Central Excise, New Delhi v. S.R.  Tissues  Pvt.  Ltd.  [2005  (186)  E.L.T.  385],  the  question  before this Court was whether on cutting and slitting of  jumbo  rolls,  several  new  products  emerged,  namely,  table  napkins, toilet rolls, etc., and there being a value addition  of 180 per cent of the new products over the jumbo roll would  by itself lead to the irresistible conclusion that there is  “manufacture” and not mere “processing”.  This was turned  down  by  this  Court  stating  that  jumbo  rolls  cannot  conveniently  be  used  as  such  for  household  or  sanitary  purposes.  If therefore, for the sake of convenience, they  are required to be cut into various shapes and sizes so that

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they can conveniently be used as table napkins, etc., this  would not mean that the table napkins, etc., would be a new  product distinct from the jumbo roll.  The end use of both  jumbo rolls and toilet rolls, etc., would remain the same,  namely, for household or sanitary use.

It was then held following  Union of India   v.  J.G.  Glass Industries Ltd.[ 1998 (97) E.L.T. 5] that there is a  fundamental distinction between manufacture and processing.  On an aspect not adverted to in the Delhi Cloth and General  Mills Co. Ltd. case supra, this court held that where the  commodity already in existence is of no commercial use but  for  a  super  added  process,  then  on  facts,  there  may  be  manufacture.   

In the present case, it is clear that bumpers and  grills are most certainly of commercial use in themselves  whether the process of ED coating is applied or not.

Importantly, this Court laid down that value addition  without any change in name, character or end use of goods  cannot possibly constitute criteria to decide as to what is  manufacture.

This court said in this behalf: - “21. Lastly,  in  the  instant  case,  the  

Commissioner  as  an  adjudicating  authority  has  held that there was a value addition of 180%.  He  found  that  jumbo  rolls  of  tissue  papers  were  purchased by the assessee @ Rs.30/- to Rs.70/-  per kg. and the final product i.e. the toilet  tissue paper was sold by the assessee @Rs.85/- to  Rs.100/-  per  kg.  And,  therefore,  there  was  a  value addition of around 180% i.e. between the  range of Rs.30/-to Rs.85/- per kg.  This finding  of  the  Commissioner  is  erroneous.   Under  the

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Excise law, Value addition based on a process is  certainly  a  relevant  criteria  to  decide  as  to  what  constitutes  “manufacture”.   Such  value  addition should be on account of change in the  nature or characteristics of the product.  In the  present case, as stated above, there is no change  in the nature or characteristics of the tissue  paper  in  the  jumbo  roll  and  the  nature  and  characteristics of the tissue paper in the table  napkin, facial tissues etc.  Therefore, without  such change in the nature or characteristics of  the tissue paper, value addition on account of  transport  charges,  sales  tax,  distribution  and  selling expenses and trading margin cannot be an  indicia  to  decide  what  is  manufacture.   Thus,  value addition without any change in the name,  character or end-use by mere cutting or slitting  of  jumbo  rolls  cannot  constitute  criteria  to  decide what is “manufacture”.  22. In  the  case  of  Decorative  Laminates  (India) Pvt. Ltd. v. Collector of Central Excise,  Bangalore  reported in 1996 (86) E.L.T. 186, this  Court  held  that  the  process  of  application  of  phenol resin on duty paid plywood under 100% heat  amounts  to  manufacture  and  in  that  connection  observed that value addition and separate use are  also  relevant  factors  which  the  Courts  should  consider in deciding the applicability of Section  2(f) of the Act.  Therefore, value addition based  on price difference only without any change in  the  name,  character  or  end-use  is  a  dangerous  criteria  to  be  applied  in  judging  what  constitutes “manufacture”.  Lastly, the end-use  in both the entries 4803 & 4818.90 is the same,  namely, for sanitary or household purposes.  In  the  circumstances,  value  addition  criteria  as  applied by the Commissioner is erroneous.” Shri Guru Krishna Kumar, learned senior counsel, also  

cited two other decisions in support of the proposition that,  in fact, manufacture had taken place on the facts of the  present  case.   One  such  decision,  namely,  Brakes  India  Limited v. Superintendent of Central Excise and others [1997  (10) SCC 717] dealt with brake lining blanks.  It was found  on facts that these brake lining blanks purchased by the

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appellant could not be used as brake linings by themselves  without the process of drilling, trimming and chamfering.  This  judgment  has  been  distinguished  in  para  13  of  the  judgment which has been cited above, namely, Commissioner of  Central Excise, New Delhi  v.  S.R. Tissues Pvt. Ltd.  [2005  (186) E.L.T. 385].  Unlike the facts in the  Brakes India  Limited judgment, on the facts here, bumpers, grills, etc.,  are  of  commercial  use  and  liable  to  duty  as  such,  even  without any ED coating.

Shri Guru Krishna Kumar, learned senior counsel, then  cited  Siddhartha  Tubes  Ltd. v.  Commissioner  of  Customs  &  Central Excise, Indore (M.P.)[(2005) 13 SCC 559].  This case  again concerned manufacture of galvanised pipes.  This court,  in a very significant passage, stated:

“At the outset, we may state that value is the  function of price under section 4(4)(d)(i) of the  Act. The concept of "valuation" is different from  the concept of "manufacture". Under section 3 of  the Act, the levy is on the manufacture of the  goods. However, the measure of the levy is the  normal price, as defined under section 4(1)(a) of  the Act. It is not disputed that galvanization as  a  process  does  not  amount  to  manufacture.  However,  on  facts,  it  has  been  found  by  the  commissioner  that  the  process  of  galvanization  has  taken  place  before  the  product  is  cleared  from  the  place  of  removal,  as  defined  under  section  4(4)(b).  Further,  on  facts,  the  commissioner  has  found  that  galvanization  has  added  to  the  quality  of  the  product.  It  has  increased  the  value  of  the  pipes.  Hence,  the  costs incurred by the assessee for galvanization  had to be loaded on to the sale price of the  pipes. Therefore, the cost had to be included in  the assessable value of MS galvanized pipes. We  do not find any error in the reasoning of the  adjudicating authority.”

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It is clear, as is apparent from the opening words of  Section 4 of the Central Excise Act, 1944, that there must  first  be  manufacture  in  order  to  attract  the  charging  section, namely Section 3 of the Central Excise Act, 1944  before one comes to valuation of goods under Section 4.   

On  the  facts  of  the  present  case,  we  have  first,  therefore, to arrive at whether there is “manufacture” at all  and only subsequently does the question arise as to if this  is  so, what  is the  valuation of  the processed  goods and  whether duty is payable upon them.  We have found on facts  that for the purposes of the proviso to Rule 57F(ii), the  inputs that were not ultimately used in the final product but  were removed from the factory for home consumption remain the  same despite ED coating and consequent value addition.  We  follow the law laid down in S.R. Tissues Pvt. Ltd.'s case and  state that on account of mere value addition without more it  would be hazardous to say that manufacture has taken place,  when in fact, it has not.  It is clear, therefore, that the  inputs  procured  by  the  appellants  in  the  present  case,  continue to be the same inputs even after ED coating and that  Rule 57F(ii) proviso would therefore apply when such inputs  are removed from the factory for home consumption, the duty  of excise payable being the amount of credit that has been  availed in respect of such inputs under Rule 57A.

We now, come to the second argument made by Shri Guru  Krishna Kumar, learned senior counsel, namely, that from a  reading of Rule 57F (3) and 57F(3A), that Rule 57F(1) should

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be construed in such a way that the moment an input which  falls under the said Rule has a value addition on account of  processing it will cease to be an input covered by the Rule.  To appreciate this argument, we set out rule 57F(3) and Rule  57F(3A) which are as follows: -

(3) [Subject  to  sub-rule  (3A)  and  notwithstanding]  anything  contained  in  sub- rule(1),  manufacturer  may  after  intimating  the  [Assistant Commissioner of Central Excise] having  jurisdiction over the factory and obtaining dated  acknowledgment of the same, remove the inputs as  such, or after the inputs have been partially  processed  during  the  course  of  manufacture  of  final products, to a place outside the factory,-

(a)  For  the  purposes  of  test,  repairs,  refining,  re-conditioning  or  carrying  out  any  other  operation  necessary  for  the  manufacture of the final products and return  the same to his factory, for,-  (i) further use in the manufacture of the  final product; or (ii) removing the same without payment of  duty under bond for export; or (iii)  removing  the  same  after  payment  of  duty for home consumption.

Provided that the waste, if any, arising in the  course of such operation is also returned to the  said factory;  

(b)  for  the  purposes  of  manufacture  of  intermediate  products  necessary  for  the  manufacture of the final products and return  the  said  intermediate  products  to  his  factory, for,- (i) further use in the manufacture of the  final product; or (ii)  removing  the  same  without  payment  of  duty under bond for export; or (iii)  removing  the  same  after  payment  of  duty for home consumption.

Provided that the waste, if any, arising in the  course of such operation is also returned to the

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said factory:  Provided further that the said waste need not  

be  returned  to  the  said  factory  after  the  appropriate duty of excise leviable thereon has  been paid. (3A) Where a manufacturer intends to remove the  

inputs as such, or after the inputs have been  partially  processed  during  the  course  of  manufacture of final products to a place outside  the factory for the purposes specified in sub- rule(3),  the  manufacturer  shall  do  so  after  debiting an amount equivalent to the amount of  credit of duty attributable to such inputs or the  inputs  contained  in  such  partially  processed  inputs;  

Provided  that,  notwithstanding  anything  contained in rule 57A, the manufacturer shall be  eligible to avail of the credit of an equivalent  amount after the inputs or the processed goods,  as the case may be, have been received back in  the factory of the manufacturer;  

Provided  further  that  the  manufacturer  shall not take credit under this sub-rule unless  the inputs or the processed goods, as the case  may be, are received in the factory under the  cover of the document on which such inputs or  partially processed goods were removed from the  factory.

It was conceded by Shri Guru Krishna Kumar, learned  senior  counsel,  that  for  several  reasons,  the  said  Rules  would not apply to the facts here but that the drift of these  rules shows that where inputs are removed to a place outside  the factory when they are only partially processed, then when  they come back after the process, the value addition made on  account of such processing would be chargeable to duty under  sub-Rule 3A.

This  argument  cannot  be  accepted  for  two  basic  reasons.  First, we would be adding words to Rule 57F(1) to  the effect that value additions made to inputs covered by

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sub-rule (ii) would also suffer duty even if there is no  manufacture.   Second,  sub-rule  (3)  and  (3A)  apply  to  an  entirely different factual scenario, as has been conceded by  learned counsel for Revenue, and it is only after all the  conditions  under  the  said  sub-rules  are  met  that  duty  attributable  to  inputs  contained  in  partially  processed  inputs would then become dutiable.

In view there of, we allow this appeal, set aside the  judgment of CEGAT and resultantly, the demand made in the  show cause notice as reduced by the Commissioner.  We hasten  to add that the penalty imposed on the appellant has already  been set aside by CEGAT's order which part of CEGAT's order  will stand.

The appeal stands disposed of in the aforesaid terms.        

..........................., J. [ A.K. SIKRI ]

..........................., J. [ ROHINTON FALI NARIMAN ]

New Delhi; March 12, 2015.